"The only thing we have to fear is fear itself," Franklin D. Roosevelt said in his first inaugural address. It is probably the most memorable thing he ever said, and it is worth recalling now -- 50 years after the start of the Depression -- because it was simply a flight of fancy, a reassuring lie, when Roosevelt said it. Today it may be good advice.
The most striking thing about the Depression is that, even half a century later, no solid, scholarly agreement exists as to why it happened. The plausible arguments about how government might have prevented it serve only as material for cocktail conversation or economic seminars. They oversimplify, and don't account for the 1930s prejudices or contemporaries' dim view of the Depression's beginning: realities that frustrated decisvie action when it might have helped. Delay was fatal.
Today's stories, for example, date the Depression's start from the stock market collapse on Black Tuesday, Oct. 29, 1929, but 50 years ago, the demarcation point did not appear so sharp. President Hoover's self-serving declaration, some months later, of the Depression's end looks silly now, but he wasn't flagrantly at odds with public opinion.
People expected short, dramatic depressions. Based on detailed examinations of news reports and bond ratings, economic historian Peter Temin recently concluded that most people probably didn't view the Depression as different from others until the fall of 1930. Could they be blamed? In 1930, unemployment averaged 8.7 percent, less than the 11.7 percent level of the 1921 depression -- which, in turn, had preceded the long, spectacular 1920s boom.
What marks the Depression as the century's seminal economic event was not only its severity but also its duration: the inability of the system to regenerate itself, as most people had assumed. Roosevelt's policies didn't help much. In 1939 unemployment averaged 17 percent. To say that government today could prevent such tragedy -- a good bet -- is different from saying that, in the context of the times, it could then.
According to one school of thought, government should have reacted to the collapse of private spending by increasing government spending. But this ignores not only the prevailing orthodoxy, which urged balanced budgets and was embraced by both Hoover and Roosevelt, but also the sheer magnitudes involved.
Remember that in 1929 federal government purchases amounted to only 1.2 percent of the national output. It is true that the enormous public spending of World War II obliterated the Depression, but the increase in outlays was staggering. In 1941, when the unemployment rate returned to single-digit levels (averaging 9.9 percent), federal spending -- mostly for defense -- nearly tripled to about 14 percent of output. By 1942, it was almost 40 percent. Is it plausible to think nondefense spending could have jumped so spectacularly?
Another economic school holds that the Federal Reserve caused the Depression by permitting a massive number of banks to fail. Fearing for their savings, people demanded their money back. Banks -- which normally expect only a small percentage of deposits to be withdrawn -- sought to meet the higher demand for cash by selling investments and restricting loans. In short, they contracted credit and money just when a struggling economy needed more of both. Hundreds of banks failed anyway.
Theoretically the Fed could have minimized this by massive loans to banks or purchases of securities, which would have provided cash. But such responsiveness assumes an instantaneous wisdom that usually comes only with hindsight. Even then, Temin's analysis ("Did Monetary Forces Cause the Great Depression?") doubts the critical role of the banking crisis.
The economy clearly needed a source of inflationary power from somewhere to stem the disastrous deflation -- prices dropped 25 percent between 1929 and 1933 -- that eroded the economy's foundation and shredded the social fabric. Debts contracted at old, higher prices couldn't be repaid easily with sales made at new, lower prices.
And events snowballed. A bad harvest in 1929 reduced farmers' purchasing power when the farm population was still on-quarter of the nation's total. American protectionism and depression abroad helped collapse trade. The stock market crash weakened consumer spending and confidence. By the time people realized that the Depression was different from others, the damage -- closed firms, failed banks, lost savings, destroyed faith -- may have been so great that recovery could come only slowly or through an equally powerful cataclysm: World War II.
We are creatures of out experience, and the experience of the 1930s permanently redefined the social responsibilities of the public and private sectors. Just as business claimed full credit for the 1920s success, it suffered almost complete blame for the 1930s collapse. The logic was imperfect, and the New Deal programs built on it worked imperfectly, Roosevelt's greater achievement, as sympathetic observers such as Arthur M. Schlesinger Jr. have noted, was political: He salvaged the essentials of a democratic, free-enterprise system by changing details.
Now this orthodoxy is dated. The gravest test for any society is its ability to accept and adapt to the changes necessary for its survival and prosperity. We instinctively know many of the adjustments now required: to scarcer energy, to less certain global economic conditions. But we risk compromising our adaptability by demanding too much of our political system.
This is the essence of the orthodoxy inherited from the Depression: the idea that government intervention is necessary to temper the rigors of the free market and, thereby, preserve individual liberties of private enterprise. But so many groups now want protection from economic change and chance -- protection against imports, higher inflation or higher energy prices -- that their demands, if rejected, may produce political cynicism or, if accepted, simply make things worse.
As in the 1930s, we need to redefine public and private responsibility. The economic system -- people and firms acting individually -- adapts more easily than is commonly supposed. In the past six months, it has swallowed a 50 percent gasoline price increase; by contrast, political leaders argued inconclusively for five years over ways to reduce oil demand. As FDR prophesied, we are paralyzed more by fear of change than by change itself.